John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
As a father of two hockey players – and a shinny enthusiast myself – I spend a small fortune at Canadian Tire on sticks, shin-pad tape, helmets and other gear.
While I'm there, I'll occasionally pick up a jug of washer fluid, some furnace filters or – depending on what the kids lost or outgrew that week – a bike helmet or pair of swimming goggles.
Canadian Tire may not have the customer service of Home Depot or the impulse-purchase appeal of Costco, but its convenient locations and broad selection of sporting goods, automotive products and household items have helped it carve out an enduring niche in Canadian retail.
And that, in turn, has made the stock a great investment.
Over the past five years, shares of the Toronto-based company have posted a compound annual price return of 16.8 per cent. Including dividends – and assuming they were reinvested in additional shares – the total annual return was a scorching 23.2 per cent, crushing the S&P/TSX composite index's 8-per-cent total return over the same period.
Because of the stock's modest yield – currently about 1.8 per cent – it often gets short shrift from dividend investors. But the retailer has built a solid record of dividend growth, having more than tripled its payment over the past decade – including a 13-per-cent increase announced in November, when the company reported strong third-quarter results as same-store sales rose across its retail banners.
Can "The Tire" keep rolling? The answer is yes, according to analysts who expect the momentum to continue when the company releases fourth-quarter results on Thursday morning.
In a note to clients, Kenric Tyghe of Raymond James said he expects fourth-quarter revenue to climb 7.2 per cent to $3.62-billion, with same-store sales – from locations open for at least a year – rising 3.4 per cent at Canadian Tire, 3.6 per cent at Mark's and 6.6 per cent at FGL Sports (which includes Sport Chek, Sports Experts, Pro Hockey Life and Atmosphere). He sees earnings per share rising about 11 per cent to $3.33.
Even after the stock's outsized gains, Mr. Tyghe has an "outperform" rating on the shares. His 12-month price target is $165 – roughly the midpoint of analyst predictions that range from a high of $180 to a low of $149, according to Thomson Reuters. The stock closed Tuesday at $143.48.
Not everyone thinks now is a good time to load up on Canadian Tire's stock.
In a recent note, Edward Jones analyst Brittany Weissman said Canadian Tire's price-to-earnings multiple of about 15.6 – based on her 2016 earnings estimate – is above its historical average and "appropriately reflects our expectations for continued improvements in Canadian Tire retail sales as well as modest long-term earnings growth."
She rates the shares a "hold."
Still, Ms. Weissman is upbeat about the company's prospects. Its strong market position – about 90 per cent of Canadians live within a 15-minute drive of a Canadian Tire store – and its merchandising and technological prowess should lead to earnings growth "in the mid- to high-single digits over the long term, unless the company makes another acquisition."
Canadian Tire also benefits from a strong balance sheet, and its 83-per-cent interest in CT Real Estate Investment Trust – which the retailer created in 2013 to hold a majority of its real estate assets – gives the company added financial flexibility should it need capital to reinvest in the business, buy back shares, make an acquisition or pay down debt.
"In addition, Canadian Tire has about $1-billion worth of additional real estate it plans to sell to the REIT over the next several years, which we believe should benefit shares," she said.
For dividend investors, this all points to further growth ahead. Ms. Weissman expects that the company – which pays out a conservative 25 per cent to 30 per cent of its previous year's earnings – should be able to raise its dividend by 10 per cent annually over the long run. While that would mark a slowdown from the dividend growth rate of about 17 per cent over the past five years, it's still something to look forward to – especially if the stock continues to post solid capital gains.
Disclosure: The author owns shares of CT REIT (CRT.UN).
Yield Hog is part of Globe Unlimited's Strategy Lab series.
John Heinzl